Category Archives: Op-Ed

Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over. With few national branches, these local banks will have a much more difficult time spreading risk geographically, and are thus more prone to failure.

Egged on by provincial leaders desperate to keep the wheels of GDP growth rolling forward and cash-strapped property developers, other institutions have jumped into Shadow Banking. And one of the biggest are Chinese insurance companies.

One of the theories of China’s slowing economy is that it will run into a “Lehman moment”. This is when a single financial institution collapses, threatening the entire banking system, ultimately creating a financial crisis.
The theory has neat predictive power: find the weak links among Chinese banks, pin down a useful measure of financial liquidity ­ such as the interbank lending rate ­ and you have a nice way of keeping tabs on the strength or weakness of China’s economy. The problem is the theory may be wrong.

Conducting company due diligence in China can be a risky undertaking. Company filings are inadequate, financial statements often cloak the truth, and executives are prone to mislead investors. There are two metrics often overlooked by Western investors that are helpful in judging whether a company is shaky or an outright fraud: Related Party Transactions (RPT) and what I call “State Connections.”

Sara Hsu, State University of New York, and Andrew Collier, Orient Capital Research

The party is over for Chinese banks, who have for the last few years enjoyed record profits. Since the end of 2008, the Chinese leadership’s desperate bid to keep the wheels of growth turning has let a flood of credit into the banking system……